In SaaS, $1 of sales & marketing spend is worth $5 in revenue

06/21/2017By Sammy Abdullah, CFA

One of the most important metrics for any business is determining the amount of revenue that $1 of sales & marketing spend will yield. In other words, does $1 of sales & marketing result in $0.50 of new revenue, $1, or much more. The table below shows that the median SaaS business generates $0.54 of new revenue per $1 of sales & marketing spend in the first year.

Revenue

Revenue

Revenue

Growth

Growth

S&M

S&M

S&M

2016

2015

2016

2015

2014

2016

2015

2016

2015

2014

Efficiency

Efficiency

Hortonworks, Inc.

HDP

$184,461

$121,944

$46,048

51%

165%

$183,542

$133,052

$70,695

$0.34

$0.57

Wix.com Ltd.

WIX

$290,103

$203,158

$141,841

43%

43%

$97,742

$120,010

$156,512

$0.89

$0.51

Splunk, Inc.

SPLK

$949,955

$668,435

$450,875

42%

48%

$653,524

$505,348

$344,471

$0.43

$0.43

New Relic, Inc.

NEWR

$263,479

$181,309

$110,391

45%

64%

$168,163

$129,677

$89,162

$0.49

$0.55

Box, Inc.

BOX

$398,605

$302,704

$216,440

32%

40%

$253,020

$242,184

$207,749

$0.38

$0.36

Blackline

BL

$123,123

$83,607

$51,677

47%

62%

$77,810

$56,546

$31,837

$0.51

$0.56

Instructure

INST

$110,880

$73,193

$44,352

51%

65%

$69,991

$53,459

$35,390

$0.54

$0.54

MobileIron, Inc.

MOBL

$163,926

$149,298

$132,295

10%

13%

$101,757

$105,520

$99,870

$0.14

$0.16

HubSpot, Inc.

HUBS

$270,967

$181,943

$115,876

49%

57%

$162,647

$112,629

$78,809

$0.55

$0.59

Castlight Health, Inc.

CSLT

$101,700

$75,315

$45,605

35%

65%

$58,800

$67,414

$62,065

$0.45

$0.44

Proofpoint, Inc.

PFPT

$375,496

$265,397

$195,607

41%

36%

$201,204

$148,414

$98,333

$0.55

$0.47

Zendesk, Inc.

ZEN

$311,999

$208,768

$127,049

49%

64%

$166,987

$114,052

$77,875

$0.62

$0.72

Cornerstone OnDemand, Inc.

CSOD

$423,124

$339,651

$263,568

25%

29%

$225,631

$207,026

$162,552

$0.37

$0.37

2U

TWOU

$205,864

$150,194

$110,239

37%

36%

$106,610

$82,911

$65,218

$0.52

$0.48

Coupa Software

COUP

$133,775

$83,678

$50,845

60%

65%

$68,562

$54,713

$33,724

$0.73

$0.60

RingCentral, Inc.

RNG

$379,724

$296,228

$219,887

28%

35%

$192,497

$139,851

$104,827

$0.43

$0.55

ServiceNow, Inc.

NOW

$1,390,513

$1,005,480

$682,563

38%

47%

$700,464

$498,439

$341,119

$0.55

$0.65

LogMeIN, Inc.

LOGM

$336,068

$271,600

$221,956

24%

22%

$162,811

$138,946

$119,508

$0.40

$0.36

Apptio

APTI

$160,569

$129,251

$106,615

24%

21%

$75,856

$71,337

$60,775

$0.41

$0.32

salesforce.com, Inc.

CRM

$8,391,984

$6,667,216

$5,373,586

26%

24%

$3,918,027

$3,239,824

$2,757,096

$0.44

$0.40

Lifelock

LOCK

$587,469

$476,016

$369,658

23%

29%

$273,389

$213,984

$162,363

$0.41

$0.50

IntraLinks Holdings, Inc.

IL

$276,153

$255,821

$234,496

8%

9%

$124,006

$115,867

$108,428

$0.16

$0.18

Xactly

XTLY

$95,461

$75,974

$61,111

26%

24%

$40,187

$34,836

$28,877

$0.48

$0.43

Mindbody, Inc

MB

$139,021

$101,369

$70,010

37%

45%

$56,460

$46,345

$30,922

$0.67

$0.68

LivePerson Inc.

LPSN

$222,779

$239,012

$209,931

-7%

14%

$89,529

$94,728

$83,253

-$0.18

$0.31

WorkDay, Inc.

WDAY

$1,569,407

$1,162,346

$787,860

35%

48%

$583,874

$434,056

$315,840

$0.70

$0.86

Jive Software, Inc.

JIVE

$204,094

$195,793

$178,693

4%

10%

$74,654

$78,684

$90,141

$0.11

$0.22

Bazaarvoice, Inc.

BV

$199,766

$191,181

$168,145

4%

14%

$69,808

$78,373

$86,482

$0.12

$0.29

Shopify

SHOP

$205,233

$105,018

$50,252

95%

109%

$70,374

$45,929

$23,351

$1.42

$1.19

SPS Commerce, Inc.

SPSC

$193,295

$158,518

$127,947

22%

24%

$65,886

$55,374

$46,990

$0.53

$0.55

Marin Software, Inc.

MRIN

$99,878

$108,530

$99,354

-8%

9%

$32,889

$45,132

$47,716

-$0.26

$0.20

Five9, Inc.

FIVN

$162,090

$128,868

$103,102

26%

25%

$52,748

$42,042

$37,445

$0.63

$0.61

BroadSoft, Inc.

BSFT

$340,962

$278,843

$216,857

22%

29%

$107,142

$83,806

$69,471

$0.58

$0.74

Qualys, Inc.

QLYS

$197,925

$164,284

$133,579

20%

23%

$57,970

$49,569

$48,049

$0.58

$0.62

Secureworks

SCWX

$429,502

$339,522

$262,130

27%

30%

$124,950

$111,978

$85,046

$0.72

$0.69

The Ultimate Software Group, Inc.

ULTI

$781,291

$618,081

$505,936

26%

22%

$224,416

$169,664

$117,033

$0.73

$0.66

Appfolio, Inc.

APPF

$105,586

$74,977

$47,671

41%

57%

$28,827

$26,076

$16,876

$1.06

$1.05

RealPage, Inc.

RP

$568,128

$468,520

$404,551

21%

16%

$135,213

$123,108

$111,563

$0.74

$0.52

Benefitfocus, Inc.

BNFT

$233,335

$185,143

$137,420

26%

35%

$55,488

$58,589

$48,467

$0.87

$0.81

Athenahealth, Inc.

ATHN

$1,082,900

$924,700

$752,600

17%

23%

$256,600

$237,300

$196,800

$0.62

$0.73

Medidata Solutions, Inc.

MDSO

$463,381

$392,506

$335,071

18%

17%

$109,290

$103,153

$83,435

$0.65

$0.56

Twilio

TWLO

$277,335

$166,919

$88,846

66%

88%

$65,267

$49,308

$33,322

$1.69

$1.58

Veeva Systems Inc.

VEEV

$544,043

$409,221

$313,222

33%

31%

$116,803

$80,984

$56,203

$1.15

$1.19

Atlassian Corporation

TEAM

$457,058

$319,521

$215,109

43%

49%

$93,391

$67,989

$34,968

$1.47

$1.54

Average

$554,600

$431,797

$331,383

31%

40%

$239,882

$197,005

$158,196

$0.58

$0.60

Median

$273,560

$199,476

$154,993

27%

33%

$106,876

$98,941

$81,031

$0.54

$0.55

We’re calling this $0.54 the sales & marketing “efficiency”. To measure it, we looked at the dollar growth in revenue from 2015 to 2016 divided by marketing spend in 2016. A an example, if I spent $100 on sales & marketing, and my revenue grew from $450 in 2015 to $500 in 2016, then my sales & marketing efficiency is $0.50 ($500-$450 / $100).

So is $0.54 good for a SaaS business? Actually it’s fantastic, given that the typical SaaS company retains 99% of its revenue from the prior year according to a net retention analysis we did. See the table below for net retention of SaaS companies that report the metric.

2013

2014

2015

2016

Name

Ticker

Retention

Retention

Retention

Retention

Marketo, Inc.

MKTO

100%

109%

105%

acquired

Cvent, Inc.

CVT

---

100%

100%

acquired

Demandware, Inc.

DWRE

100%

100%

100%

acquired

Veeva Systems Inc.

VEEV

---

138%

125%

127%

New Relic, Inc.

NEWR

---

110%

130%

125%

2U

TWOU

144%

112%

120%

123%

Blackline

BL

---

118%

120%

116%

Box, Inc.

BOX

144%

126%

117%

115%

Zendesk, Inc.

ZEN

---

---

123%

115%

Instructure

INST

100%

100%

100%

100%

Five9, Inc.

FIVN

100%

96%

96%

100%

Xactly

XTLY

---

104%

105%

99%

RingCentral, Inc.

RNG

---

99%

99%

99%

HubSpot, Inc.

HUBS

83%

93%

99%

99%

SecureWorks

SCWX

99%

96%

108%

98%

Apptio

APTI

---

---

100%

98%

Cornerstone OnDemand, Inc.

CSOD

95%

94%

95%

95%

Benefitfocus, Inc.

BNFT

95%

95%

95%

95%

Castlight Health, Inc.

CSLT

---

103%

116%

94%

Proofpoint, Inc.

PFPT

90%

90%

90%

90%

MEDIAN

100%

100%

103%

99%

AVERAGE

105%

105%

107%

105%

Retaining 99% of revenue means the $0.54 of new revenue turns into $0.53 the next year, 51 cents by the 5th year, and $0.49 cents in year 10. If we add up all the years into perpetuity assuming a 99% retention rate forever, then that $1 of marketing spend given a $0.54 efficiency will ultimately be worth about $53! Discounting those cash flows for the time value of money – because receiving $0.49 in year 10 is far less valuable than receiving $0.49 today – each dollar of sales & marketing spend is worth about $4 to $5 right now. The table below shows the math.

Efficiency

Discount Rate

Value Right Now

$0.54

0%

$52.88

$0.54

5%

$9.45

$0.54

8%

$6.48

$0.54

10%

$5.40

$0.54

12%

$4.65

$0.54

15%

$3.88

The point of all this math is that a good SaaS business should absolutely focus on sales & marketing efficiency. Indeed if you can keep it near $0.54 per $1 of marketing spend and maintain 99% net dollar retention, you’ll be on your way to going public, just like the companies presented above.